Arizona Real Estate License Practice Exam 2026 - Free Real Estate Practice Questions and Study Guide

The principle that suggests excess profits lead to ruinous competition is rooted in the concept of diminishing returns. This economic principle states that as more of a variable factor is added to a fixed factor, the additional output gained from the variable factor will eventually decrease. In a competitive market, when some firms begin to realize excess profits, it attracts new competitors who want to capitalize on that profitability. However, as more competitors enter the market, the supply of the product increases, leading to a decrease in prices (and profits) for all firms involved. This scenario can create a situation where the intense competition for profitability can drive prices down to the point where no one is earning a sustainable profit, ultimately destabilizing the market.

In contrast, the other principles mentioned—anticipation, substitution, and conformity—address different aspects of economic behavior and do not specifically account for the dynamics of competition and profitability in this manner. Anticipation involves forecasting future trends or demands, substitution deals with replacing one product for another, and conformity relates to following established patterns or norms. These principles don't directly address the consequences of excess profits leading to increased competition and its impact on market stability.